Forests, finance, and the future: economic risks of nature loss
01:37:09 Share

Welcome to the LSE events podcast by the London School of Economics and Political Science. Get ready to hear from some of the most influential international figures in the social sciences. Welcome to the public lecture on forest finance and the future economic risks and nature loss.

I am Rob Petalano. I'm the executive director here at CTEX, the Center for Economic Transition Expertise. And it's a pleasure to be here for a few reasons. One, I just started two months ago, so it's a pleasure to be at LSE. Two, it's a pleasure to be with this distinguished panel, and I've known some of them for years and have heard them speak on these topics, so it's wonderful to get them here together.

And three, it's wonderful to be here with you because this is actually really a serious issue. So while it's a pleasure to be here, what we're talking about really is startling and quite serious. And educating people from students to professors to even people in the field who are working on this, sharing knowledge with each other is really critical.

Before I go any further, I want to do two things with respect to housekeeping. First, as I think many of you in the audience already know, if there is a fire drill, you just go out the way you came and the folks here who helped see you will help get you out.

And then secondly, I just wanted to thank Maria Wayford because she has been managing this behind the scenes for the past few weeks and also prepping and orchestrating many of us. So just thank you for the efforts for doing that.

So let me go forward and say I want to introduce SeaTex. So I've said we're the Center for Economic Transition Expertise. We're called SeaTex. I will just give you a little bit of background because we were launched a year ago, but now we're really in full force and we're moving forward, doing a lot with nature, with climate, also with critical minerals. We are a research center, but you'll get a sense even today that we're really about driving impact, but doing it through credibility, through evidence,

through working with policymakers and with other stakeholders to try and get that right, to make sure that policy decisions are really based on sound evidence and research. And the institutions that we serve-- and we say we serve them. We're funded with philanthropy, but we serve these institutions proactively. Our central banks, finance ministries, regulators, even international organizations. And what we do is we provide evidence-based research, policy analysis.

policy guidance, capacity building in various forms. And here we are today convening. So this is part of what we do to try and build both education, but also momentum and frankly a bit of political capital to get people coming in from around the world to actually debate these issues and feel a bit more confident when they go back to their institutions, particularly in certain parts of the world, and to have the courage to talk about the evidence and drive policy through evidence.

What I would like to do is to talk a bit about environmental risks. We'll be talking about that all night, but some of you probably know these issues more than others. So I want to give a bit of an overview so that we put in context the discussion today about deforestation.

So first, a lot of important work has been achieved in the past decade on assessing various environmental risks to the financial system and to economies.

And I would say that that has really focused on financial stability, in part because of the momentum of the Financial Stability Board and NGFS, the Network of the Greening of the Financial System, et cetera. And there's been a clear prioritization on climate. For better or for worse, there's been a clear prioritization on climate and has done very well by this prioritization to actually be effective in at least formulating policy

and policy responses. And of course that's been implemented differently in different parts of the world, but at least that momentum is there. However, in addressing and reducing environmental threats to sustainability, it should also consider nature degradation and of course the erosion of ecosystem services.

And while less attention has been given to this topic, the negative impact on such degradation under downside scenarios is apparent. And I want to say from the start that since we've been working with stakeholders and with central banks, many of you here are actually doing that work night and day. So for you, this is core to what you do, but I think we can all agree that relative to the emphasis and the...

prioritization and the resources put to climate, nature is really trying to move ahead and make progress. So what I would say is, for example, the World Bank's modeling of nature shock illustrates that a collapse of several ecosystem services could result in the fall of global growth by 2030 by 2.7 trillion. So the analysis that has been done is groundbreaking and it's really startling, and yet,

And a lot more work needs to be done to turn some of the macro modeling and the overall view about the impact to economies, to the financial system, and to policies to try and address some of these challenges. So one key element of nature degradation is the erosion of forests, and that's what we'll be talking about tonight. So forests provide important services such as carbon capture, water capture and filtration, hazard protection from floods and landslides.

air quality, regulating temperature and diseases, and a host of provisioning and supporting services. But because these services actually have tangible economic value, the continued erosion of forest poses serious concerns for economic stability. If you can measure it and if you know it has value, when it erodes, clearly that has a negative effect on growth and it has a negative effect on asset quality in the financial system, which has consequences.

So in this context, our work at SeaTex on nature in the public lecture this evening, it strives to shed light on this, and I'll talk a little bit about

If you're saying that the work on nature has been a bit behind climate, how well is it known by policymakers? Good progress has been made. So let me just start at the very top. COP 15, the Convention on Biological Diversity in 2022, agreed to a global biodiversity framework, a bold and ambitious set of practical commitments to halt and reverse nature loss by 2030. And what you're going to hear tonight, obviously, is that we're quite far away from that.

And subsequently at COP16 in Rome, governments adopted the first global strategy for financing biodiversity.

At the Brazil G20, the ministerial declaration highlighted the need to strengthen efforts to halt and reverse biodiversity loss, and importantly, to stress the importance of enhancing efforts to halt and reverse deforestation and also forest degradation by 2030. So at the very high level, you can see the ambition. Your policymakers from your countries have signed up to the fact that this is urgent and we have targets by 2030.

And turning to the financial system, the Financial Stability Board, and for those of you who don't know it, it brings together central banks, finance ministries, regulators, like we do, and brings them together to talk about financial stability. They did a stock-taking of nature. By the very fact that they did a stock-taking of nature, subtly, they're saying that this is within the realm of systemic risk.

And what they did was they conducted a stock taking and it highlighted authorities work to date which signal that financial institutions face large exposures to physical and natural risk via their investments in financing.

And it also flagged work by the NGFS and by the OECD. So let me just say that for the NGFS, I mean, if I had to summarize it, it helped create a taxonomy based on nature science for policymakers in the financial field to understand what is quite complex and quite foreign to them, including some of us, and turn it into something that they understand as supervisors, as monetary policymakers.

And in parallel, the OECD, including some people here, worked on a report which is a comprehensive framework to map the flows of risks and potential losses from ecosystem services to the economy and to the financial system. And they did this broadly, globally and conceptually, and they applied it to a certain country to show that that could work in effect.

So I wanted to acknowledge as well that there is groundbreaking work and we should be pleased to see given the urgency at the highest level of the G20 and COP, but nevertheless given the task which is to halt nature loss by 2030, the work that's done is really a drop in the bucket relative to what we need to do.

And I would just say too, for my team here, the value in work they've done, SeaTex has contributed to building awareness and urgency to act on nature erosion and to bring insights and knowledge sharing and to try and turn that urgency into research, into capacity building, into really good policy awareness and insights to try and help move this work forward.

And the staff had co-led NGFS-inspired study group on biodiversity. They have advanced scenario analysis for nature-related financial risks, nature degradation and price stability. They conducted an in-depth study on blue economy and the core of tonight's discussion about hidden harms in deforestation. And that will be a talk that we will have very soon.

So in these ways, CTEX is trying to fill in the gap, particularly where some countries don't have the resources to continue with this or they wish to do more. We're trying to step in here at LSE to bring people together to go to countries and to try and make progress on this so together we can actually see policy action that matches the urgency of what we're hearing from leaders.

So in this light, the event aims to deepen our understanding of the profound consequences of deforestation, how to address them, and it's through the lens of deforestation as a primary driver of nature degradation that we'll delve into some of the forest ecosystems and global economy and financial system consequences.

So with that, in sum, I would just say we want to use this debate to really shape understanding, to really think through the lens of biodiversity expressed through COP and through G20, to try and build understanding to challenge each other about what more we can do and what gaps are still there, and then to generally support these efforts for sustainable, inclusive growth and a sound financial system.

So with that, I want to thank you all for your interest in being here tonight. And I'll just turn it over now to Elena, who will talk about the very specific issues at hand. And as she's about to come up, I want to say Elena here is a senior policy fellow at CTEX. She leads all of our nature initiatives.

and has been doing this for over 60 years now with a focus on nature-related financial risks and central banking. She led the NGFS INSPIRE study group on biodiversity, and previously she worked on monetary policy at the Central Bank of Malaysia, sustainable finance at the UK Foreign Office, and served as a climate advisor at the Bank of England. And now she's here with us. So, Elena, over to you. Thank you.

Hi everyone, good evening and thank you so much for being here for our public lecture program on forest finance and the path forward on World Biodiversity Day. This evening I will be presenting some of the findings from our recent CTEC's report titled Hidden Harms: The Economic and Financial Consequences of Deforestation and Its Underlying Drivers. It's available on the CTEC's website or by scanning the QR code on the screen. Okay, so

Through my presentation tonight, I'd like to help build an understanding of the critical functions or as Rob mentioned, the ecosystem services that the world's forests provide for society and the economy and how forests are under pressure from economic and governance issues. I will also highlight the economic and financial consequences of deforestation. And I hope this presentation will set the scene for the discussion we will have later tonight. To start,

I wanted to show you how quickly we are losing forests and how little we have left. While there are many international pledges to conserve forests,

They have not been very successful, and the ones that are currently just signed, for example, the Global Leadership Declaration at the COP26 signed here in the UK or the COP15 are overly ambitious, and we don't seem on track to meeting them. We are quickly and systematically losing our forests.

In this chart, we use data up until 2018, which showed that forests comprise only 38% of land as compared to 10,000 years ago where we had 57% of land being forest. Today, data in 2023 show that this number has fallen to 28%. So it is important that we address this problem to ensure ecological stability.

These losses in forests are not reversible in the short term because forests take hundreds of years to mature and to provide the functions that rely on them upon. It is vital that we halt deforestation and forest degradation.

So, here are some of the ecosystem services that forests provide for societal and economic well-being. And Rob has mentioned some of them before, but I wanted to give two concrete examples to paint a picture of what they might be. So first,

Forests provide crucial barriers that protect humans from diseases and research shows that degraded ecosystems may not perform this function effectively. For example, looking specifically at malaria as a disease, deforestation has been shown to worsen its incidence by promoting breeding habitats and extending the life cycle of mosquitoes, which then lead to higher human biting rates.

This consequently leads to issues such as premature mortality, high medical costs, reduced economic activity as a result of sickness, lower productivity, higher school and work absenteeism, high fertility rates, and population growth. And all of this can have effects on households to reduce income, savings, and investments, as well as limiting economic opportunities.

Secondly, healthy forests help protect humans from physical hazards such as storms and extreme rainfall which, as we all know, is increasing in severity and intensity as a result of climate change. Without healthy soils, one of the functions that forests help provide, flooding and landslide events

become more frequent and severe, which become detrimental to the safety for local communities, but can also destroy capital and transport infrastructure affecting economic output and trade.

Turning now to the economic pressures driving deforestation. These stem from a very small number of economic activities, namely agriculture, timber harvesting, and mining. In Latin America, cattle ranching and soy dominate. In Southeast Asia, it is palm oil and timber. Often, more land is cleared than is needed for immediate economic activity in anticipation for future economic activity which may not materialize.

Importantly, new areas of economic pressures are emerging. For example, in the need to mine critical minerals that are not only necessary for the green transition, but increasingly used in terms of production of weapons, which is especially happening in, where mining is especially happening in developing countries.

To really understand what drives deforestation, we have to look beyond the forest frontiers and examine the broader economic systems that enable it. In our report, we identified three main issues. First, there is international demand. Global appetite for food, fuel, and consumer goods that you and I use on a daily basis, like cosmetics and technology, puts pressures on forests.

Many low and middle income countries depend on extractive activities like agriculture and mining to meet this global demand. Second, the international financial system often pushes countries towards deforestation. For low and middle income countries, weak currencies and high borrowing costs make it very hard to attract sustainable investment, leading them to fall back on forest-based exports.

And crucially, global finance, especially from advanced economies, continue to back deforestation-linked activities. Finally, there is a real trade-off between sustainability and growth. Countries with rich forest biomes often face tough choices. Conserve nature or unlock its short-term potential economic gains. Where poverty alleviation is urgent, the balance often tips towards deforestation. Missing one slide, but I can just talk through it.

it is crucial to recognize

that deforestation doesn't happen in a vacuum. Beyond the economic pressures, there are also governance pressures that worsen forest use and forest governance. At the global level, we lack enforceable legal mechanisms to conserve forests. There is no consistent definition of what constitutes as a forest, and we still rely heavily upon private sector voluntary initiatives around conservation.

At the domestic level, forests are often viewed as revenue-generating assets, not ecosystems to be protected. Legal frameworks focus on profit maximization, not conservation, which enables elite capture and corrupt governance around land use.

Trade and supply chain governance, which is gaining in popularity, for example the EU deforestation regulation, could also fall short in terms of forest governance. Efforts to regulate forest risk commodities tend to focus on supply and not demand, and often overlook justice and equity issues. These governance failures accelerate deforestation by reinforcing the economic logic of forest loss and forest degradation.

Ultimately, forest loss isn't just an environmental issue. It triggers cascading effects across nature, economy, and the financial system. When forests are degraded, we lose the critical services that forest provides: clean water, climate regulation, disease control, and biodiversity, among others. This results in rising hazards like floods, disease outbreaks, air pollution, and the loss of natural resources that many communities and industries rely upon.

These impacts quickly spill over into the economy, labor productivity falls, supply chains are disrupted, healthcare costs rise, and natural capital is destroyed. And all of these feed directly into the financial system. For firms and investors, this means higher credit, market, and operational risks. On top of that, shifting preferences, technological advancements, and policy changes adds further volatility and risks.

The final message for me is this. Deforestation is not just an ecological tragedy. It creates widespread and compounding risks that affects the economy and financial system, which are hidden at first, but can grow as long as we ignore it. Thank you so much for your attention, and I'm happy to pass the floor back to Rob.

Thank you so much, Elena. And just to check again if you can hear it sounds... Yes, you can. Okay. Wonderful. So now let's begin. Let's begin the discussion and the debate. And what I'd like to do is just introduce the guests for you. And first, we will start off with Luis Oasio Pereira da Silva. Luis was...

was deputy general manager of the Bank for International Settlements in Basel since 2015. And prior to that, he served as the deputy governor of the Central Bank of Brazil and in various senior roles in the World Bank and also in Brazil's ministries of budget and planning and finance. So he sees it from both sides.

with all three sides, central banking, finance ministry, and international organization. And he is now a visiting professor in practice here at Sea Tax at LSC, and I understand he also teaches in different parts of the world, so we're really privileged to have him with us tonight.

And then Elias Bagli. Elias is Director of Monetary Policy Division at the Central Bank of Chile, and he previously led the bank's research division and held senior roles in modeling and economic analysis in Southern California, the Catholic University of Chile, and the University of Chile, where he currently teaches a seminar on planetary limits and economic development.

And on the far end, Pablo Pacheco is the WWF's Global Forest Lead Scientist. He previously worked as a principal scientist at the Center for International Forestry Research based in Bulgaria, Indonesia, focusing on forest governance, trade, and sustainable and inclusive value chain.

And he also worked at the Inter-American Institution for Cooperation on Agriculture and conducted consultancy work at the World Bank and the FAO. So his research focused on forest governance, drivers and dynamics of deforestation and forest degradation.

And then online, Jessica, I hope you can hear us and see us perhaps. Jessica Dempsey is a professor at the University of British Columbia specializing in political ecology. Her work explores a complex and deeply political causes and pressing global issues such as biodiversity loss, climate change, and environmental dispossession.

and her major projects focus on political economy of extinction, critically analyzing the growing influence of economic and financial approaches to conservation.

So I think you can see here that the panel we have is really diverse and perhaps for some of you even the types of roles, either the researching what they're covering may be entirely new to you, may not even have known that these are areas of exploration. So getting folks with very different backgrounds and different perspectives from around the world should lead to a rich discussion.

And with that, if everyone is OK, we'll move to round one. And we're really going to try and introduce for you the human, the ecological, and financial states of deforestation, really multidisciplinary, to bring these issues together. And the first question--

Pablo, if I may, the first question for you is from a scientific and ecological perspective. Why must we urgently protect forest ecosystems given that there are these sort of chronic problems that are ongoing? And what are the risks if we fail to do so? Yes, thank you for that question. I have spent many years of my career doing work on forests. But I think I don't exaggerate when I say that forests, they sustain life on Earth.

Forests, they provide all these multiple functions. And as we were hearing the lecture on economic, ecological, climatic, social, they contribute to regulate climate, hydrological flows. They provide habitat for species, so they contribute to biodiversity conservation. Forests contribute to people livelihoods, but also provide materials, services and materials that also sustain economic growth.

But I think most of the interest of the recent interest on forests is because of this important dual role that they play on climate. As we know, forests, they

absorb and store carbon, so they are a carbon sink, but at the same time they can release that carbon when they are clear cut or they are burned. And I think that has captured the attention of forests on the policy debates. But at the same time, forests, they provide these contributions to hydrological cycles, as I will say. So you can think of forests as a very large

large-scale water pump. So they pour water from the ground and also release this water into the atmosphere. So this contributes to regulate evo-transpiration, precipitation, water flows. But also forests, they have this very critical role on regulating local and regional temperatures. And so they are affecting

also precipitation levels and temperatures that also may affect the performance of agriculture. And as you know, much of the resilience of agriculture depends on climate stability, precipitations, temperatures. So the disappearance of removal of forest also affects agricultural productivity. And now we have more and more studies that they are making these connections between forest laws and agriculture.

but also forests, they are the home for 60 million indigenous people.

have forests at their home. 400 million depend on forests, live close to forests. But more than that, 1.6 billion people, they depend on the income, food, materials from forests. So again, I don't think that I exaggerate when I'm highlighting this important role of forests for climate, for the economy, and for the livelihoods of people. So what are the impacts that we can anticipate from losing forests?

And there are many. Also we are going to lose species that depends on those forests. We are going to put food production on risks. But also forest removal is going to amplify the climate impact. And what are these climate impacts that I'm talking about? It's going to be very much connected to longer dry seasons, and we are already experiencing those longer-term dry seasons in the tropics.

and also droughts, so there's going to be less precipitation. And something that's more important now, and we are just realizing, is that because of droughts and higher dry seasons, forests are also getting more vulnerable to fires. And probably you have heard all this news last year that large expanses of forests have been lost.

mainly in Brazil and Bolivia. A report has just been released saying that the whole tree cover loss has increased 80% in 2024 because, very much because of fires. And that is also adding carbon to the atmosphere. So, and fires are degrading forests. And eventually a portion of forests that get burned, they are maybe

converted to agriculture. Some other ports may regrow, but then we have this circle that fires are going to lead to more deforestation. So following that, so if forests are so important, why is it that we keep losing them?

And Elena already made some suggestions why is that, but it's because the economy is based on these short-term profits, based on building assets, and much of the agricultural expansion that's fulfilling the world, it happens in the topics.

for food and food production that leads to road expansion. Road expansion attracts more people into the frontiers. Also there's this financialization of commodity crops and something that's quite critical and I also would like to highlight that was not enough highlighted by Elena, which is saying yes, trade is growing and international demand for these crops is growing, but at the same time we have to take into account that domestic markets are so important.

and domestic markets in the tropics are very important and probably the main trigger of deforestation. Mainly when we think about cattle in Brazil, 80% of the production of beef in Brazil goes to the domestic market and just 20% is exported. So when we think about solutions, yes, we have to think about solutions that are coming from the consumer countries, but also solutions that are coming from the producer countries.

And probably just one thing to finalize is that all these processes are not linear. So we can say, yeah, but it really doesn't matter because we still have a lot of forest that could be converted to agriculture and still we are going to be able to, or these impacts are not going to be so dramatic.

But new science has been suggesting that these impacts are not linear and potentially there's going to be a tipping point. So it's going to be a point in which in the Amazon this tipping point is being estimated if we lost 20 to 25% of the Amazon there's going to be this tipping point and the system may collapse.

And we are relatively close to that tipping point, where 14, 17% of deforestation in the Amazon. So also we have to think about that, that there may be these tipping points. We don't know. They are hypothetical. But that tells us that we probably have to--

factor that in order to anticipate these potential impacts that we can face. Excellent. Thank you so much Pablo. So you really laid out an excellent framing of the scientific and ecological perspective and a really good case that may make Luis's comments a bit easier because Luis, I'm going to ask you, based on everything we've said,

Clearly, this is a critical issue over the long term, but policy isn't very good at addressing the long term given political cycles and the mandate of central banks. So what is then the case? Why should there be a case for deforestation as a critical issue for financial actors, for central banks, for finance ministries, given that with their mandates they may be myopic? How do you get them over that?

So, as a former central banker in the panel, I'm supposed to be the bad guy, right? Who doesn't care about deforestation, what Pablo is talking about. Well, I mean, actually, with the evidence that is emerging, but also the scientific work, traditional central bankers, myself included,

are increasingly aware that deforestation, nature-related destruction, climate risks are not simply sort of a moral issue. They are what is a new, very severe, existential, global systemic risk. And therefore, because of that, policymakers, particularly central banks,

have to consider and have become increasingly aware that what is happening to nature, what is happening to climate affects the effectiveness of them fulfilling their mandates. Basically price and financial stability.

If you have, like Pablo described, repeated supply shocks to our environment, it does have an effect on, for example, agricultural food prices and therefore inflation and therefore price stability. So central banks have to begin considering this in the way they model the activity of an economy and also their reaction to what is happening in terms of inflation.

If you have climate-related risks and destruction, it also affects financial stability because of the damage that it causes, because of the changes in valuations of assets, of financial risks.

and therefore the cost that it impinges on the fiscal authorities, it has an effect on public debt, it has an effect on growth, it has an effect on activity, on employment, and therefore it does have an impact on fulfilling financial stability if you are a central bank with this mandate, and therefore you cannot just ignore it. You have to sort of begin considering it.

uh... the central banks are trying to do

under the idea that you have to sort of put a name on this new global systemic risk. We call this green swans. Remember we had the black swans of the global financial crisis. This is a new animal. This is something much more serious than an episodic risk, a tale of a distribution risk caused by a financial crisis. This is going to happen if we do not

take care of this degradation of our environment, of climate, you do have a series of cascading effects that would affect the capacity of both the fiscal authorities and central banks to fulfill their mandate. So to answer the question why is it that we should be interested in this, it's because it's our job. Now it is even more serious because climate

has unfortunately a feedback loop. Climate degradation, nature degradation triggers inequality. Inequality triggers populism. Populism triggers the incapacity to address politically climate action.

So therefore, what you need to construct, and policymakers are responsible for macroeconomic, but also to create social consensus to implement their policies, you have to create the right balance between addressing climate risks and also creating a fair and just environment.

social environment and social model for development. This is particularly important for the relationship between developing countries and developed countries where the trade-offs, the need to develop, the need to feed the people, the need to sort of create better welfare conditions for everyone has to be balanced against the need also to protect nature, to protect the environment,

and to sort of achieve the right and fair balance in terms of distribution of resources. So what is it in practice that central banks have done? Well, they have created a network

a club of precisely to discuss these issues. It's called the Network for Greening the Financial System, whose objective is precisely to put in place the right models, the right approaches, where they examine all this evidence. They sort of look at what can be done by the financial sector. The financial sector, after all,

finances the development of activities that have an impact on climate and on nature and therefore what is the best way to conduct all this.

So bottom line, indeed, after a period where this was something considered outside the realm of central banks, increasingly the central banking community is investigating and taking actions in terms of regulations, in terms of monetary prudential policies to make sure that they can at the same time fulfill their role in terms of development

growth and also address development models social justice and the minimization and the mitigations of climate risk it's not an easy task you have no sort of automatic consensus among many policymakers that this should be done but I think progressively with the evidence with dialogue

with the capacity to also convince other and to dialogue with other areas in civil society, I think overall we are making progress. Climate is not an agenda that has to be tackled and can be tackled and addressed by a silver bullet conducted by only central banks. It has to be a

collective effort or all actors in society including central banks but also other authorities and also other organizations in society. Great, thank you very much Luis. So I think that comprehensively shows why central banks should be focused on these issues really if they think about their mandate over the medium term. I want to turn now to Elias who

who is doing this in practice in the central bank of Chile. And I would just say, I was at the central bank of Chile visiting a few years ago and was really struck from what I heard about the amazing biodiversity in parts of Chile. But also to Luis's point that for the purpose of growth, you also have mining and other activities

that are part of nature degradation and that's very challenging for the central bank to assess it let alone to have policy. So how are you grappling with that and what innovative tools are you trying to use to get over some of these challenges that Luis has mentioned? Thank you for that question and for the opportunity to share my views on the subject. So to try to answer the question I'm going to be wearing two hats.

The first is as a director of the monetary policy research, which is applied research that tries to help with the decisions of the interest rate, what the board of the bank does with the interest rate. The second hat is as a member of the Network for Greening the Financial System, the NGFS.

So the Central Bank of Chile has been privileged to be a member of the NGFS for almost seven years now. And I cannot stress the importance of that because it has really helped us guide our research efforts.

So I would like to say a few words on the advance that the NGFS has made on this space and then illustrate some of the more theoretical points with the actual work that we'll be doing at the bank, just as an example.

So the NGFS has many work streams, right? And the more recent one is the Task Force for Nature. So the NGFS started trying to understand climate issues, and now it is trying to also incorporate and develop a framework to understand the more broad nature degradation issues.

So the first part of this work, Task Force for Nature, was on building sort of a conceptual guide. I mean, how do we even start to understand this program? How do we nail it down to some guiding principles to guide the actual applied work?

So last year we published the conceptual framework that basically does this, that tries to give a guideline. And it's basically to understand it intuitively, it's built on three aspects. The first one is we need to understand the stressors to the system.

They can come from fires, they can come from flooding, some of these shocks are bad luck for a small country. Some of these shocks are actually endogenous. It depends on the economic activity, like deforestation that we've heard about. But these are all, that's why understanding nature is a bit more complicated than climate, because there are different sources of stressors. So that's the first part, understanding where the shocks are going to come from. They can also come from changes in policies, for example.

Then the second aspect is, how does this stressors manifest and transmit themselves through the structure of the economy? That's going to depend on how different sectors are interlinked, whether a country produces certain goods or they import them or export them and so on. Once you understand the macroeconomic transmission of these potential stressors,

Then the third part is trying to understand how financial intermediaries are exposed to these potential effects, essentially financial risks. So that's the conceptual framework. Now the

task force is in the second step, trying to actually implement and illustrate the usefulness of this conceptual framework through particular case studies. So now let me turn to what we're doing in the centre back of Chile just as an example. So the effort essentially involves layering different types and different sources of information.

So the first source of information, which is the one that I find more interesting, is mapping the country in terms of ecosystems. So not administrative regions anymore, or where firms are located. It's about, okay, where are the deserts distributed in Chile? Where are the forests? Where are the former forests that now are croplands? So that's the first layer of information, which actually takes a lot of work. It's not like you can just...

I mean, it requires some effort in that part. The second layer of information is where are firms located physically? I mean, where are the mining companies? Because that's going to give you an idea how they depend on ecosystems, right? Okay, so where are the firms that depend on agriculture located? And the third source of information is where are firms located in the

transactions space in the sense that where they located relative to other firms in the production network. Once you layer these three sources of information you can start understanding how a shock, for example, as you simulate a scenario where there's a huge loss of forest through wildfires that we've had in Chile more often now, what are the firms that are directly exposed to that?

What are the firms that are indirectly exposed because they're part of the supply chain? And then finally, how are banks exposed to these issues through this information? So that's sort of an ambitious agenda.

It's not something that we're going to do in a year or so, but it's an effort for building an information system that can allow you to answer different questions. So just to end, let me give an example that's more related to forests. It's one particular question that we've already made some advancements in the Central Bank of Chile. We modeled the

impact that would have trying to follow the commitments that Chile has already made in terms of reducing CO2 emissions. That's part of the Paris Agreement. We're still holding our end of the bargain there. So in Chile we have no back down from that. And we actually have a clear strategy and the strategy involves managing forests among other things. So basically what we did is take this standard macro model, add to it ecosystem services

and try to evaluate methodologically what would happen if Chile actually implemented these different forest management strategies. And we have a couple of results that are very interesting. First, we find that implementing these management strategies will allow the country

with actually some room extra to fulfill the Paris Mandate. So they are enough to fulfill the Paris Mandate. That's important because that's not obvious. Second, that the cost effectiveness of different measures is not the same. We find, for example, that by far the most cost effective measure, and this is related to what Pablo was saying, is preventing

wildfires, because that's essentially protecting the stock of forest that you have. And this is much more cost-efficient than starting a forest plantation from scratch or recovering forest. I mean, these are still worth doing. Don't take me the wrong way. But by far, the best thing you can do is invest money in trying to prevent fires. And the third result of this, I thought, was more striking to me at least, is that by doing these policies,

you enhance the provision of multiple ecosystem services. And through this enhancement of multiple ecosystem services, you also enhance economic activity and employment.

So I was expecting to find a trade-off, you know? You gain something on nature but it has a cost to the economy. It turns out that this cost is not even there, not even in the short term. These policies might also, if they're well designed, might also, and this was the case in our study, they also enhance growth and employment. So it's not necessarily the case

Now, this might not be true everywhere, but at least in the Council of Chile and this policy that we evaluate, we did not find such trade-offs. This is basically a win-win situation. So I'll stop it here and happy to take more questions. I hope that folks find that fascinating, that at least with this there's not a trade-off, but that it's a win-win. But I would imagine who wins and who...

that there are losers within that. Maybe it's firm-specific, industry-specific, and that's where, as Luis is saying, it's not up to the central bank. You need to get public policy, perhaps at the fiscal level or other ministries involved, to try and make that transition effective.

Now we're gonna turn to Jess Dempsey, and Jess, I would say, I'm not sure you can see us. I'll turn to you because that's where you are on our screen, but hopefully you can see us and you've heard what's been said. So you've heard the scientific,

the big picture about international financial architecture, how central banks are reacting, but from your standpoint, now we get down to really the financial institutions. They're the one, Elena touched on that, that they're really ones that are empowering the nature degradation by the way that they're lending. How do you see this with financial institutions? What makes it so challenging?

As Elias was saying, maybe there is a win-win. Do we see something that financial institutions should be doing to dramatically change how they're lending in a way that can keep them sustainable as well? How do you see that? Hi, I'm interrupting this event to tell you about another awesome LSE podcast that we think you'd enjoy.

LSE IQ asks social scientists and other experts to answer one intelligent question, like why do people believe in conspiracy theories? Or can we afford the super rich? Come check us out. Just search for LSE IQ wherever you get your podcasts. Now back to the event. Okay, I wanted to just thank you and also for everyone for bearing with my

my participation from a distance. I also really wanted to congratulate Elena and the team at CETEX for what was a fantastic piece of work. It's so comprehensive, it's so serious, and I say serious with real appreciation because

The forest and finance space, I think, is often filled with magical thinking. I'm referring here to the long history of efforts to make nature conservation investable or the emphasis on reporting and disclosure mechanisms.

Of course, we really need powerful and hopeful visions of the future, but to get there, we really need to be critically reckoning with the serious problems. And this report was refreshingly honest about those problems and really the role that our economic and financial systems are playing in driving forest loss. So thank you.

So now to your question, which is about what makes it so challenging for financial institutions from banks to asset managers to central banks to the IMF, like what makes it so challenging for them to seriously address deforestation and forest degradation? What sort of barriers are in the way? I want to state first

something that is not in the way. We do not lack information or big numbers on degradation or the risks. And if we treat this as an information problem, e.g. we just need to wait for more fine-grained models on how deforestation will impact inflation or Canada's GDP, we are essentially agreeing to massive ecological impacts.

So for example, where I sit in Canada, in the north of British Columbia, caribou are going extinct due to forest degradation caused by the forest industry. This is well established in science. It's a major concern for Indigenous people in that region. We don't need more information about it. But the loss of caribou caused again by industrial forestry

will never show up as impacting on GDP. It doesn't even show up in the ESG ratings of major forest companies known to cause the damage. So by the time we get to macroeconomic signals, there will just be huge amounts of collateral damage, including the loss of a species of crucial importance to an entire way of life.

So I just think we need to keep in mind that there's a real risk that these economistic and financial approaches will reaffirm the same short-term profit thinking that we're trying to actually depart from. So I just think it's a risk. I'm not saying I think this work is all so important, but I think it's a risk we need to be constantly attentive to.

Okay, so why the lack of action by financial institutions? I think most basically financial institutions don't take action because without state signals like regulations preventing deforestation, these ecological changes are just simply not material to them. Elena's report points to governance issues like this, including lack of accountability in global agreements like the CBD, highlights similar challenges in domestic legal systems,

In Canada, a country often held up as a pinnacle of sustainability, we continue to incentivize and even subsidize sectors causing forest degradation that imperils wildlife like caribou. We're not unusual among countries, of course, 90% of biodiversity loss is caused by extractive sectors, including industrial agriculture, and these are all often subsidized and incentivized by the state.

So all of this means really that financial institutions don't really have the political signals to pay attention to this deforestation, never mind take action. But, and this is my final point, and I think this is quite crucial, is that we can't just blame the state, a line I often hear in the forest and finance world. I hear it all the time from NGOs who are just like, "Well, we can't trust governments. They're politically, they're unaccountable."

But part of why states won't advance strong measures to protect and restore forests domestically and also in their international negotiations is because precisely of the economic pressures put on states through the international financial architecture. And that was also a key take home of Elena's report.

finding of a study that we released last year where we looked at five highly biodiverse countries and found that in their pursuit of financial stability, meaning in their efforts to pay debts, maintain investability, comply with IFIs, they expand commodity frontiers that cause deforestation and biodiversity loss.

And when states do send strong signals, they want like a different, more sustainable development pathway. They can face discipline from the same architecture. Like when Columbia announced its desire to keep oil in the ground, it faced credit rating downgrades, currency devaluation, same with Ecuador.

So really, like I think in sum to go directly to your question, you know, there are the barriers are structural, there are governance problems, of course, but these governance issues need to be understood as entwined with and really impacted by economic pressures enacted really through the international financial architecture as well. And I'll leave it at that. Thank you for bearing with those audio issues.

- Jess, thank you so much, and to reward you for your patience as well with the tech problems. I just have to ask you, because we've talked a lot about climate transition and net zero, and I appreciate that with nature. If we have a goal of just sort of being net by 2030, do you think that state signaling could be some sort of mandatory or arm twisting about transition plans, and to make that part of supervisory actions, or would that be--

Well, that's interesting. I mean, that sounds good. That sounds good. I don't know how many of you have spent any time reading national implementation plans of, say, the Kunming Global Biodiversity Framework or NDCs, but you will find that in those plans there is not a lot of transition planning happening. So I think that's a really interesting idea and something I would love to hear more and learn more about what the role of central banks could be in such a thing. Okay.

- Excellent, maybe that's a topic for the next lecture. With that, thank you so much Jess. I'm gonna move on, so we're gonna close the first round. We will have Q&As at the end, but let us move on to the second round, which is to try and deepen the discussion and get beyond, we've talked about the scientific basis, we've talked about financial architecture, central banks, and financial institutions, but now we'll move to the structure and political forces, which a few of you have alluded to,

broader mechanism that's driving the continued degradation, including the financial system. So with that, first, Luis. So you've mentioned this to us at CTEX and in other fora, that this pressure, the geopolitical uncertainty and the shifting political priorities

particularly in certain countries and at the G20, they're creating headwinds for international cooperation on climate and nature crises. They're trying to change the narrative in ways that are really creating a short-termism. How do you see the new political reality in that sense? And does that give space at this point for central banks and finance ministry on their own in different countries or through international fora to have courage and to do what they need to do on nature-related risks?

Yes, I think we have to realize that we are facing a very new political situation in the world, particularly because, let's name it, the trade war initiated by the Trump administration has basically been and will be a major distraction for the climate agenda, sending all the

wrong signals. It is sending protectionism. It is removing regulatory advances that were made. It is neglecting foreign aid and not helping countries to precisely work on their climate agenda. It's reversing

many of the trends and awareness that were achieved by science, by dialogues such as this one. And therefore we have to take this sad reality into account and work around it. Now I think the first thing is to also understand why is it that such a narrative

such conservative narrative has so much appeal in many segments of societies in developed countries. Well, one possible explanation is because the climate agenda sometimes, right or wrong, is perceived as something that is pretty much

an agenda by people that have already achieved a certain standard of living, the elites of the country, and not necessarily causing or in sync with some of the legitimate aspirations of lower income groups in society. Think of, for example, the way in which it has been expressed by the Yellow Vest Revolt in France.

Or think of it as also the lack of understanding in some developing countries about the need to change their standards of living or limit their consumption of energy or limit their capacity to access better welfare because of some of the climate imperatives.

Incomprehension is something that I think needs to be addressed by precisely making sure that the climate agenda is absolutely compatible with development. It's absolutely compatible with the right type of transfers and social policies in the developed world that can mitigate some of the

of accessing to a cleaner type of society that we are all aiming at. So this sort of capacity that we will need

to construct climate policies that are at the same time addressing the transition to net zero, but also transferring the right amount of resources to developing countries and also to low income segments in the populations of developed countries is of the utmost importance to reverse the capacity that the narrative of

administration such as the current US is capable of constructing to block the climate agenda. Now in practice what sort of can be done by central banks or other groups in societies, well it's to assume that we will have to live in this new world

in a different type of multilateral construction. Perhaps not with temporarily, hopefully just not forever, but temporarily without the US, but constructing perhaps different types of coalition of the willing.

where groups, groupings of countries that are engaged and want to proceed with the climate agenda will be able to regroup themselves in policies that will be designed according to the needs for the transition to net zero.

and construct a productive agenda that would serve not only their own interests but the interests of the coalition and also never forgetting the need to engage with the development agenda of the global south. If we are capable of making the transition

in this difficult period towards this type of good coalition of the willing, including development, including social justice, I think we will be able to live with some of the negative elements of the Trump agenda and we'll be showing the world that even without a major player such as the U.S.,

I think we will be able to succeed in the transition. And mind you, it's not only the U.S. as a monolith. I mean, the U.S., within the U.S., has a lot of communities that will be able to also participate in this global coalition of the willing. This is my hope.

Luis, wonderful. Thank you so much for that. And I do think something that we haven't mentioned explicitly is one of the key differences between nature and biodiversity is a lot of progress can be made on biodiversity in individual nations and with policies with central banks and finance ministries. And even in this very difficult environment,

there's promise for these policies. If I may, I'd like to go back to Jess. And Jess, I hope I'm not putting words into your mouth, but to summarize, I mean, my sense is you've drawn this interesting balance between financial stability on one hand and ecological instability. And I understand that you've also written about that. The way you've described it is really fascinating. Can we talk a little bit more about that? So from your vantage point, how does the current political environment or political movement

exacerbate this perhaps through tariffs, through populism, how does it make it worse and are there any solutions to that even in this political environment as Luz was saying? Yeah thanks, I'll wait for you to raise hands if you don't hear me. So yeah this argument that we made in a recent piece of work about sort of the tensions between financial stability and ecological stability

I guess first I'd just say financial stability is not that easy to define and there are many others on this panel and in the room probably who are much better suited to that but I just want to say what I what I how I understand it I draw from an IMF piece of work that says you know it's the ability to facilitate enhance economic processes manage risks absorb shocks of which there are many today

And in pursuit of this stability under current norms and sometimes required, it means low levels of debt, tax, regulatory conditions conducive for private investment and growth. And for some countries, it means like piles of US dollars in reserves.

So the argument is basically countries whose economies are dependent on resource extraction sort of find themselves in a real bind because as we know expanding commodity frontiers are creating more risks to financial stability as others have already said, including Eleanor's report.

But under current conditions, the answer to those instabilities and many others, including the geopolitical shocks of our present moment, is really expanding those same commodity frontiers. So I'm going to use an example of where I live, again, in British Columbia, in Canada, also to take us further.

out of sort of like the narrowness sometimes about focusing on the U.S. and then also a global south focus. So in Canada, there's a huge amount of political economic uncertainty, in part due to the Trump tariffs and threats of the 51st state. I say in part due to the Trump regime because these new uncertainties sit on top of four credit rating downgrades that we've had in British Columbia over the past three years due to a growing public debt and a lack of private investment and slow growth.

A recent finance minister, again here in British Columbia, explicitly linked this growing public debt to the proliferating set of climate and nature-linked disasters that BC, British Columbia is becoming known for. In 2021, we were hit by an unprecedented heat dome in the summer.

devastating wildfires that same summer, followed in the fall by an atmospheric river and a flooding event that washed away a major highway and caused just enormous damage to communities. Studies again focused here in BC show that the floods and the fires are at least in part linked to industrial forestry practices and to land use change. So again, that sort of transmission line has been made.

These events created huge economic costs. One study suggests that disasters, just those ones cost between 10 and 17 billion dollars, equivalent to 3 to 5% of our GDP.

Again, government officials note the rise of public debt that's linked to the credit downgrading is due to, in part, these costs of cleanup and repair from these events. So what is the response of the government to climate nature-linked instabilities and the instabilities of the Trump tariff offensive and the credit downgrades?

Sadly, I have to say it's to double down on expanding the resource extraction implicated in those environmental risks and instabilities, including industrial forestry, mining, oil and gas.

The word of the year in Canada, I would say, or the phrase uttered most by Canadian and BC politicians, including Mark Carney, the famed central banker, besides elbows up, which is like a hockey reference and refer to how we should respond to the Trump tariffs threats.

The other phrase that's probably most commonly heard is streamlining and fast tracking. A streamlining of what? Mostly they're talking about streamlining environmental regulations that are assessing the impacts from resource projects with an aim to like fast track approvals to get investment flowing and shovels in the ground. These are not populist governments. Probably you all know that.

very progressive government here in BC, a piece of legislation currently being debated right now in the legislature would give the government powers to expedite projects, regardless of the environmental impact, power lines, mines, wind farms, liquefied LNG facilities, all are being deemed like essential to protect the province from the uncertainties of the US tariffs, in addition to dealing with debt and lagging growth.

So my government, as with so many others in the world, seems to see resource extraction as like a kind of lifeboat for its instabilities. So the question really is that I'll leave us with is, does it have to? Are there more win-win-wins as we're already referred to? Is there an alternative pathway to financial and economic stability that really goes all in on forest conservation and restoration?

I think really creating the economic international financial systems for that pathway is really should be our urgent priority. At the moment, it doesn't exist. And this is even for a rich G7 country like Canada, at least from what we're seeing right now. Thank you so much.

and I was just doing the math in my head, it sounds like financial stability creates ecological instability, but over time as that instability tips, it creates tragedy that has implications for systemic risk and for debt sustainability, and if only the credit rating agencies and central banks can put that in their models to get those medium-term terrible effects and bring that to the short term and bring it to policymakers.

I think there could be ways to break the cycle, but that's work. I think that's great work for us to do. But speaking of risks, I'm at risk right now because I know we're pressing up against time. So I have two more questions, and maybe we can drive right to the point. Pablo, your background is all about governance, and we haven't talked enough about governance. But what are the systemic shifts needed to better align financial incentives with forest protection from your governance perspective?

That's not quite an easy question to answer because in spite of what has been said here, I still think that there are very hard trade-offs that countries in the tropics they face with, mainly when thinking about economic development, providing services for the poor, health and education, and having to pay the bills of international debt.

and also the narrative that you were describing. I think, yes, it holds, but there is lots of nuances. For example, in the past we have seen that countries rich on oil and gas, they were putting much less pressure on forests because they have resources to pay the bills, but once they are running out of reserves of gas, then they need to depend on developing something new. So agricultural development linked to international markets was seen as the new engine of growth.

And at the same time, that has helped to alleviate problems of rural poverty because also we have to think that we are talking about markets and value chains that involve a large number of smallholders that are a bit inserted in these supply chains, a bit in asymmetric conditions as well. And that talks about problems of governance, so how you deal with those things.

And Jessica was saying again, also the whole financial systems have to shift in such a way that we move from these economies that are going to reward short-term profits, stop getting subsidies from nature,

and at the same time building a more redistributive economies. I think there's lots of things that are happening, at least mainly in the tropics, which is the area that I'm more familiar with, but they are happening at a very small scale. So still there's this question about how we extrapolate, replicate, scale, all this thinking about scaling is becoming much more important now.

Because on all these different fronts, as you were saying, countries they are trying to adopt more these economic valuations, having much more sense about the costs and the risks of depleting natural ecosystems. I think that's happening in many places. But at the same time, we have also banks trying to delink their portfolios from risky places. That's helping.

Central banks in some cases are issuing this guidance for how financial institutions should deal with the risk management in their portfolios, like Netherlands, for example. They did that in Brazil. They made progress as well to connecting credits and loans to reduction of deforestation in places.

overseeing compliance is difficult. So we at the same time we have seen that investing on enforcement is costly. Would be really nice to see well the experiences that Elias was saying that I

I am fully convinced that reducing fires, for example, is much more cost-effective solution, but at the same time you are talking about countries that they don't have enough resources for fire prevention. So when these

these fires, they really propagate this nothing basically that you can do and just pray that it's going to be more rain to solve your problem. So we still have these structural problems that I would say, yeah, lack of resources, costly interventions, the most cost effective, still you need resources to deal with those. And I think what's really needed on the other side is more resources flowing

to these activities that are more sustainable and there are things happening also there have been these taxonomies that have been built in well following the european union brazil is developing this taxonomy exercise colombia indonesia so you have these attempts to identify what are those activities that are more sustainable probably more can be done i think the brazilian exercise is very comprehensive to do that but that's one part of the thing then you need to really think about

resources that are going to favor those forest based economies. In the tropics is emerging this interesting debate in Brazil, for example, how to reshift a bit the development patterns and moving from this

highly dependent on exports on soy or domestic markets on beef and how to develop these bio economies that could support more local integration into local economies. But it's something difficult because there are not too many options that could compete with crop commodities that could bring cash income to these smallholders.

But probably somebody has to pay for that bill. Also, we're still relying on public resources that would come. There's this now, this bill, this proposal to build the mechanisms that would compensate for countries to keep forests standing. But still, there's need to attract

multi-billion fund to do that, but there's efforts for making that possible. So there are things happening, but still reaching a scale to solve a very systemic problem is challenging. But there's no reason why we should not lose our hope that that may happen and at some point there's going to be a shift in the economy, because also that's connected with the importance of

connecting all these debate on the role of central banks, monetary policy, with fiscal policy. And start thinking more seriously about repurposing subsidies, which is another topic that is re-emerging, and finding ways in which those resources are now there. For example, in Brazil, heavily invested on developing soy and cattle could be reinvested to other sectors, like more traditional agroecological systems, agroforestry integrated

crop, livestock, silvicultural systems, etc. So we are not lacking options. That's the thing. But it's more how reshaping the whole incentive system and that the financial institutions could at some point. In that case, I disagree a little bit because I think we need more. For example, much more evidence and assessments on

cost benefits, for example, across different systems. I think we have the overall idea, yeah, agroforestry could be more beneficial for this, for that, and that, but then when you start thinking about agroforestry, you have hundreds of different agroforestry systems and financial institutions, they need to get the detail as well of risks, costs, benefits, and that helps to make a case.

Thank you so much for that. Now, I've been given a fire drill. So for the sake of time, what we'll do, Elias, I will come to your question, and then we will do our own little fire drill, which will be, I'll give each of you a minute, and since we'll start with you, you can weave that into it, but literally a minute to sort of give the final...

Given everything that we've said, what would be a next step if you had to give advice to a policymaker, but just a fire drill advice on the one or two things that you would prioritize in doing this, what would they be?

Elias, we've talked a bit about transitions. I threw out a question for Jess, but I mean for you. Central banks are criticized often for focus so much on risk management, and the question is always, if we had more data, if we only had more data, if we could fix the models, getting beyond that to positive impact, can central banks and does the Central Bank of Chile think about transitions and transition plans in its own review of economic development? Thank you for that question. I think it's very important to be clear

about what are the things that central banks can do within their mandates and where the limits are. And it turns out that the mandates differ. Not all central banks have the same mandates. But there's one mandate that all central banks have, 99%, which is price stability. Inflation needs to be low, stable, hopefully. And for that you need analysis.

of how the macroeconomic works that translates into advice, that translates into decisions of interest rates and that sort of mitigates the fluctuations of the economy and achieves stability. So how does this connect with the issue that we're discussing?

central banks can, in the analysis that they have to perform, as Luis said, this is our job, to understand how the degradation of nature affects price stability through these macroeconomic channels, then that should be communicated. And I think that's one very important role for central banks where we need to do more.

Communicating that this is a very important issue, that this is going to affect our economies in a severe way and it's not in a hundred years, it's like in maybe ten. We could have a massive negative shock hitting our economies coming from natural degradation. And this comes literally from the analysis that we can do, that we're already doing, and I think one important role that is often not emphasized so much is just communication. Because it turns out

that society does not expect central banks to tell them that we are ravaging nature and that this is going to harm our economies. So if central banks say that, and they have a solid case for saying it, then people are going to think twice. I mean, okay, I wasn't expecting that. I mean, this is sort of a boring statement or, you know, the GDP failed to grow at 2% and this is a terrible year because it only grows at 1%.

But if you come with this different message, that really is going to sound some alarms. So that's one thing, communication. Then there's financial regulation.

For example, in the Central Bank of Chile we do some financial regulation, but that's not really our main job. There's a specific financial regulator for that, and among the things that that institution can do, or in general central banks that have mandates on financial stability and regulation, they could, for example, demand more information

on banks and listed companies on how they depend on risks coming from natural degradation. There's some advancement in that, but not nearly as much as we need. I think that's where the role of central banks stopped. And this is important to understand, because this is not going to solve the problem. I mean, it's going to help, but it's not going to solve the problem.

Because the main problem, and this is my minute, so you can start counting, this is my final thing I want to say. And here I'm going to take my two hats away, and this does not represent the view of the board. Maybe some of them agree with me, but I don't know, I would have to ask them. What we need is a very important change in public policy. Because essentially the way that our society is organized is through a price system.

If sneakers are too expensive, we'll buy sandals or something like that. So we do not need to coordinate the decisions of everybody by talking in public gatherings. We just have surprises and we take actions. But nature is not in the price system because there are no markets for ecosystem services. So we need to supplement that. How can we do that? Well, we need to provide a shadow price.

pricing nature. So if there are economic activities that destroy ecosystem services, thankfully now we have developed methods that can inform us what is the value that's being lost when you burn a nectar in the Amazon. The cost is not just the gallons of gasoline or hiring people to prevent the wildfire from spreading, which doesn't work that much as we've learned. It actually, the cost is much higher.

And we have techniques now to evaluate the loss of ecosystem services. That should be paid. More importantly, if there are activities that recover nature, then they should be paid. So that's what I mean by a price system that prices nature. And this is very important because we are not going to fix this problem by increasing conservation. We need to make investing in nature profitable. And it is profitable.

But we just need to get it into the price system. Excellent. Very clear. Analysis, communication, financial regulation, and pricing of nature. What I'm going to do, radical as it is, we need to move to the Q&A as a courtesy. This will add to the discussion, but also we really want to make sure that we have challenge from the audience for what you've said. So we'll do that. And if there's time for the policy discussion,

final policy points. I think there will be at the end. But why don't we move right away to Q&A. We have questions here and we'll have some questions online. So if you're online, we're not ignoring you, so let's have the questions come. I see a first hand up here and a second hand here. Thank you so much for a wonderful and stimulating debate. Do you hear me in the microphone? We can't. We can't.

Thank you so much for a stimulating debate. My name is Stanislav Edvardshmedev. I'm the member of the Club of Rome and the founder of Environment Europe Foundation. Some time ago we submitted a report to the UN assessing biodiversity and deforestation in Indonesia.

What's the problem? Well, currently Indonesia, being one of the most biodiverse countries, cannot even process its own CO2 emissions, just to feel how large the crisis is. And what we've managed to develop in this report is to build a taxonomy of failure, how a particular policy instrument called biodiversity offset doesn't deliver based on the evidence collected from all around the world. And you're most welcome to read the report. To the point, my question.

None of the IG targets in the previous round of declarations have been met.

What do you think is the guarantee that those that are part of the commune Montreal are going to be achieved? And what do you propose to do about those harmful subsidies that are several orders of magnitude larger that go towards nature-destructive types of activities as opposed to nature-enhancing and restoring? And let's talk about the specific policy tools. Are you

in favor of green bonds, you know, biodiversity taxes, resource extraction taxation that many, many, many people have argued for. So thank you so much. I hope it will stimulate. So I'm going to pick up a few questions, and I think we distill this down into the path we're already behind, and we're touching on some tangible fiscal tools, so we'll have folks get to that. Next question, where was the next question? Yes.

Hello, hi, thank you. I'm Ian from the International Nature Finance team in DEFRA. Just wondering if anyone on the panel has any examples of where this has kind of made it to the key decision makers in the central banks, I guess the governors, or the ministers and the finance ministries, and real tangible

kind of dramatic i suppose action has been taken to mainstream nature and biodiversity loss into decision making that can be replicated in other countries um and also yeah just wanted to see if we're kind of

safeguarding on using forests as a kind of euphemism for all the other biomes as well, like wetlands and peatlands and mangroves and ocean and all that sort of stuff. And yeah, just making sure that we're not kind of focusing on one obviously very important ecosystem, but kind of all ecosystems as well. Okay, and I think we'll have one question online.

Thank you. The online question is: Countries in advanced economies have depleted their forests. Why should Brazil or other emerging markets or developing economies be limited in their land use? Wonderful. I think for now, because I don't see -- oh, there is a hand in back. Let's take one more. Actually, way in back, if I may. Sorry. Thank you. I'm Maria Contreras from WWF, Greening the Financial Regulation Initiative.

And I was wondering whether, for example, in the central bank of Chile, have you ever made an analysis also of which would be those tools, central banking tools or financial regulation tools that would be more effective for addressing the issue?

And also it would be great to know which do you think are the challenges for central banks to really integrate these sort of tools and measures within their regulations and policies. Thank you.

Excellent. So we have four questions. First is really about subsidies and fiscals, ending subsidies that damage nature and other fiscal tools that may be nature positive. Second, the different question really about ecosystem management, but you had multiple questions. You can elaborate on that. The third is about why emerging markets need to sort of stop the degradation of nature since advanced have. I think there's a clear question there. And then the last one has to do with

I think maybe Central Bank of Chile, since it came to you, you'll answer that. Maybe we'll start first. Pablo, I'll give you a chance to answer one of those questions, if you may. OK. Please, it's up to you. That's a good question about the leakage effect. That has happened in Brazil with the soil moratorium. The attempts to protect forests in the Amazon by just looking at moratorium of soil has not stopped the conversion of Cerrado.

So that leads to these leakage effects. And now, for example, WWF is a big promoter of not just looking at protecting forest ecosystems, but also non-forest natural ecosystems. And we talk about stopping deforestation and conversion. And when we talk about conversion, we have in mind grasslands and savannas, basically. And we are trying to bring a much more integrated framework about the need to protect all these different

natural ecosystems because exactly we have that problem. You stop the problem here, but then it's going to move to somewhere else, which is going to be more relaxed regulations, maybe cheaper, land can be cheaper. So yes, I appreciate that question because we need to have this much more integrated perspective about protecting these natural ecosystems. And also, I would like to answer this question of why is that you put constraints on

If I could say that for time, I'm getting the stare. So for timing, I'll each allow one. And I'll go to Jess. Jess, you have your choice on those. I have a sense of which one. Oh, yeah, sure. Sure. Well, I don't know. I'm curious to know which one you thought. But I guess I think this question of like why the subsidies are so like hard to actually deal with is such a good research question and way more people should be working on it, I think.

I think there are reasons they're so hard. There's the yellow vest, that some of these fuel subsidies and things like that are important for everyday costs. There's regulatory capture. There's industries that really like these subsidies. And then I think that actually sometimes they're tied to financial stability issues. The subsidies help bring in investments.

bump up exports, so related to my large argument. So I think like action on subsidies, when we think about why is this so hard? We actually have to be thinking about like these political questions about regulatory capture, about sort of these broader issues as well. And I think that's where sometimes we go wrong on policy as we look at the near term proximate pieces and we don't like deal with the sort of underlying drivers of the same old status quo again and again.

I think that's really been a key take home of the IP best report that just came out, which I highly recommend others look at to the 2024 transformative change assessment. It essentially says like, we just have to like look at these systemically and at these underlying drivers.

There you go. Excellent. Thank you so much, Jess. Luis, I'll leave it to you, but I would say this emerging markets, and should we just let Brazil continue to burn the forest? Okay, so a generic answer about many of the questions that were asked here. I think we can use financial technology to construct financial products that might be

be very practical and answer some of the difficult issues of creating resources and financing for the transition.

green bonds, we can also talk about special vehicles, financial constructions for example to mitigate risks, guarantees provided by multilateral developments banks to finance green projects in emerging markets and so on. So there are a lot of things that can be done with financial technology. Remember

Financial innovation was used in a very risky way, created the global financial crisis, the subprime. It can be also used, securitization can be used for good purposes, for example, to sort of precisely mitigate risk. Now, on the answer of the legacy issue, which is an important one,

I think the answer is precisely to create a situation where emerging markets will see forests not as a commodity that you can cut and sell, but for example as a financial asset. And this is particularly the proposal, for example, to have a special fund, it's called

tropical forest forever facility which create precisely a preservation bonus if instead of cutting you construct a asset that will be potentially attractive for investors

that could provide returns for the emerging market that preserves forests and instead precisely of destroying, you can benefit from keeping it and have a good long-term return out of it. So this reversal of logic, which is something that Pablo was mentioning as well, is particularly to answer a very real question

question of legacy, one possible answer which doesn't preclude for example from the need to having the global financial funds that are transfers from the developed world to the developing world be put in place so that the developing world can construct a viable, just and fair transition to carbon neutrality. Thank you, Luis.

And last, you have the last word and it was really about the Central Bank of Chile and policy efficacy, analyzing what would be the best sequencing or use of policy measures. So I already alluded to some of the things that we're doing, but I want to go back and stress the importance of communication. With one final initiative that we have at the bank, which I think may be one of the most exciting ones,

It turns out, by some historical accident, that the Chilean Central Bank is also in charge of compiling the economic national accounts. This is not true for many central banks, but it's true in the case of us. And that means that it kind of falls on our lap to start developing economic environmental accounts, or the construction of systematic indexes and measures of natural capital.

I think this is one of the best ways in which we can serve society by communicating and with specific measurements how natural capital in our country is evolving. We're not there yet, it's a long-term plan, but what are we going to find? We're going to find that natural capital is very valuable and a corner store and a base for all economic activity, but that sadly natural capital is being reduced.

through different stressors. And I think that communicating this information and also validating methods for coming up for this valuation is a key contribution for this price system that I was mentioning. Because this price system is not going to come up as a market clearing equilibrium because there are no markets.

So you need to provide this value through an explicit valuation of something. And for that you need a method. And this method is the same method that we use for constructing the value of natural capital. So that's a very clear positive externality that the analysis at central banks can have for the rest of society.

Excellent. And I would just say that even capital markets are starting to think about how to value natural assets as well. So I think there's hope on the private sector side as well. With that, I know our time is more than up. But I do think that some of the policy messages were thrown in the questions, and it was one of the rare cases

uh... that i've had a moderate where where the panelists actually directly answer the questions so thank you for your honesty your frankness you really are your thorough ideas in the innovations and and thank my my college staff at sea tax for for the wonderful management of this and have a close all here together uh... i'm not going to do a wrap up for you because i know everyone wants to get out of here and have dinner but thanks very much for your participation your engagement

And hopefully, as we said, from what we've learned here, we take this forward and we go on and we try and do what we talked about and try and improve on the policy and the impact. With that, I want to thank the panelists very much for your engagement for this.

Thank you for listening. You can subscribe to the LSE Events podcast on your favorite podcast app and help other listeners discover us by leaving a review. Visit lse.ac.uk forward slash events to find out what's on next. We hope you join us at another LSE Events soon.